Friends,
In 1972 American mathematician and meteorologist Edward Lorenz penned an article titled: "Predictability: Does the Flap of a Butterfly's Wings in Brazil Set Off a Tornado in Texas?"
Since then, the "Butterfly Effect" has become part of pop culture. It's a stand-in for the unintended, unpredictable consequences that can unfold from actions in the real world.
Consider the recent release of DeepSeek -- a Chinese version of ChatGPT. There's lots of debate as to the validity of what it cost to make DeepSeek. What there's no debate about: the model has performed as good (or nearly as good) as ChatGPT and Meta's Llama. And if the claimed finances are true, it's done that at a fraction of the cost.
The news caused a massive sell off of NVIDIA and other chip-makers. At the same time, apps built on top of this infrastructure -- like DataDog, Snowflake, and MongoDB -- saw their shares take off. Lower costs mean more data for their consumption-based models to crunch.
And all of this started because hedge fund in China hired a bunch of young, recently graduated students to find ways to squeeze more juice from its limited supply of chips thanks to American restrictions. I doubt DataDog investors were planning on that as a catalyst.
Or consider the fate of Duolingo. In the face of a potential TikTok ban, it was reported the company's language-learning app saw a 36% spike in downloads in early January as the number of users learning Mandarin tripled. That's because they were migrating to a TikTok-esque platform: RedNote.
I doubt any shareholders were banking on a TikTok ban as part of their investment thesis.
The point: the world is incredibly unpredictable. As long-term investors, we need to focus on the things we can predict: companies that are mission-driven, with wide moats, and management with skin in the game, and that have reasonable valuations are the best bet for long-term success.
Often times, it's just those companies that end up benefitting the most from the Butterfly Effect -- because they've stuck around long-enough to reap the rewards.
Wishing you investing luck this earnings season,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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